Now, you might be wondering, "Okay, Rayner, so how should I trade candlestick patterns?"
Let's talk about that right now...
How to use candlestick patterns as an entry trigger
Let me share with you five powerful candlestick patterns that can serve as an entry trigger.
Once we've learned that, we can look at this framework and see how we can actually find high probability trading setups in the markets.
The first candlestick pattern that I want you to know is the engulfing pattern.
Bullish engulfing candlestick pattern
The green candle we see is what we call the Bullish Engulfing pattern.
Why is that?
Because if you look at the first green candle, the second red candle has engulfed the body of the previous candle.
This is why we call it the Bullish Engulfing pattern.
The other pattern is what we call the Bearish Engulfing pattern
Bearish engulfing candlestick pattern
This is just the opposite of the Bullish Engulfing.
You can see that the first candle over is bullish, buyers are in control.
But the next candle, sellers took charge and smashed the price lower, closing and engulfing the below the previous candle.
These are the first patterns that I want to share with you and it's very useful to identify market reversals.
The next one...
Hammer and shooting star
Let's just have a look at the hammer first:
The hammer is something that you might be familiar with because you saw it in the earlier examples.
The hammer is a bullish reversal pattern because it's actually showing you price rejection in the market.
In fact, it's the rejection of lower prices.
If you look at this, the price opened here:
At one point in time, the sellers were actually in control pushing price lower near the lows of this session:
Then, the buyers came in and took charge saying, "Hey, hey, this is enough, man. I'm coming in!"
So, they pushed the price all the way up higher, and finally closing near the highs:
This is a sign of strength, a rejection of lower prices.
This is what a hammer means.
On the other hand, the shooting star is just the opposite:
It's showing you rejection of higher prices.
These two patterns, again, are used to help you identify market reversals.
Dragonfly and the gravestone doji
That sounds a handful, but the pattern is very similar to the hammer and shooting star:
A Doji simply means indecision in the markets.
But for dragonfly and gravestone Doji, it's a sign of price rejection.
Because if you look at it, it's very similar to the hammer and shooting star that you've seen earlier.
The only difference is the Doji doesn't have a body.
What it just shows you are just the price rejection.
If you think about this...
Even though the price has opened and closed at the same level, it doesn't mean that the market is undecided.
Because the market has actually tilted its hand!
Because at one point...
The sellers were in control pushing price down lower, and then the buyers came in and took charge and finally pushed up all the way up higher and closing near where it opened.
Morning and evening star
The example shown above is a morning star.
We can see that this is somewhat similar to the engulfing pattern, but we have a slight variation to it.
The first candle, sellers are in control.
The second candle is an indecision Doji candle.
Because the market opened and closed at the same level.
Finally, the third candle, the buyers are in control as the price closed near the highs.
So, that's the meaning behind the morning star, it's a bullish reversal pattern.
The evening star is just the opposite:
The first candle, buyers are in control.
Second candle, indecision.
The third candle, bears came in and pushed price lower.
Tweezer top and bottom
A tweezer bottom is this one over here:
It's quite a powerful pattern because it's actually showing you rejection of lower prices two times.
If you look at the price action...
At one point in time, the sellers came all the way down and buyers stepped in, pushed price higher, and closing lower.
Then the next candle, the price opened at the lows, sellers tried to push price lower once again, then the buyers stepped in finally closing at the highs.
This is a sign of strength: rejection of lower prices.
On the other hand, this is a tweezer top:
Again, just the opposite.
Now, that you have understood the five powerful candlestick patterns...
How does this fit into the T.A.E. Framework?